Turmoil to last at least a year

Turmoil to last at least a year

The world remains in turmoil. Share prices in Asia and the rest of the world are nose-diving to their five-year lows.
Meanwhile, capitalist bastions America and England will end up owning much of their banking systems as they reassure depositors and clients their money is safe and prod banks to begin lending to each other.
In true only-an-SOB-knows-another-SOB fashion, banks don’t trust each other. Since they don’t trust each other, banks don’t want to lend to each other although the interest for interbank lending is at near-record high. Since they don’t want to lend to each other, there is no confidence and credit remains in the Ice Age. Since credit is frozen, no manufacturing, no business activity, no housing sale is moving.
The result is an economic paralysis that is bringing the US economy to near recession. In turn, the global economy is in slowdown. Major suppliers of products and services to the USA like Japan, South Korea, Taiwan and Europe will suffer drastic cuts in their growth rates.
The IMF says the US economy grew by a paltry 1.5 percent in the three most recent quarters and will likely contract in the current quarter and into early 2009, “with recession now increasingly likely.”
In America and England, politicians, finance and central bankers took the easiest way to solve the crisis – print and give away taxpayers’ money.
The UK Treasury will inject up to $87 billion into British banks to shore up their capital. It will also guarantee up to $435 billion of borrowings by banks using commercial paper. For its part, the Bank of England will provide cash of $348 billion in Treasury Bills which banks can swap for their less saleable assets. That’s a total rescue package of $870 billion, British style. The UK government had to act fast because share prices of British banks had declined by as much as 40% by October 7, thus eroding public confidence in their banking system.
The US Congress, meanwhile, approved a $700-billion bailout law that will buy so-called toxic assets which were used as collateral for loans that went sour.
The US Federal Reserve doubled to $900 billion the amount of money it will lend to banks on a short-term basis. It will also lend directly to private companies by agreeing to buy their commercial papers or IOUs. The Fed is also buying shares of stocks of banks. In less than a month, the US government has become America’s – and the world’s – largest commercial bank, investment bank, and mortgage lender. Very soon, the US government will also take over ailing General Motors and Ford so they can sell more vehicles. US vehicle sales are the lowest in 16 years.
Or maybe the US government take over Boeing, which has been hit by a strike for a month, so it can sell more planes and compete better with Airbus which is owned and supported by various European governments. For its unique version of free enterprise, the US government has incurred liabilities reaching $10 trillion –money which generations of Americans, including the unborn, will pay somehow.
The IMF says balance sheet repair in the US “will be long and arduous. It will take considerable time before losses are fully recognized, banks are recapitalized, leverage is reduced, and market confidence is regained.” Bank lending, already tight, “is likely to remain tight throughout 2009.” US consumers have less income. House prices have declined five to 17 percent in one year, the deepest since the Depression, and will drop another 10 percent by yearend. More than 10 million households owe more than the market value of their homes. Employment since January has dropped. The average work week has shrunk. Unemployment has risen by a full percentage point. Wages have stagnated. Gas prices remain high. IMF estimates the wealth of US households to be down 10 percent as a ratio of the GDP. US has a GDP of $13.8 trillion.
Intervention has become global. The US Federal Reserve, the European Central Bank and the Bank of England all cut their interest rates by half a percent. They were joined by the central banks of Canada, Sweden, Switzerland, Hongkong, South Korea and Taiwan and Australia. China’s central bank joined the choir and cut its lending rate by 27 basis points, not much but good enough for China to be considered part of the global banking barkada. Among all the countries in crisis or near-crisis, China has the deepest pocket. It has $1.7 trillion in foreign reserves—more than the bailout money combined of UK and the US. The only problem is that $1trillion of that is invested in America.
The IMF says recovery will begin in late 2009 and even so it will be very gradual.

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